XTO Energy, Inc. Q2 2008 Earnings Call Transcript

Tag : Drill Cotton

Good day, ladies and gentlemen, and welcome to the Second Quarter2008 XTO Energy Incorporated Earnings Call. My name is Eric andI'll your coordinator for today. [Operator Instructions]. XTO'smanagement will be making forward-looking statements during thiscall. Risks associated with such forward-looking statements havebeen outlined in our latest 10-K and 10-Q news release. Actualresults may vary materially. The company undertakes no obligationto publicly update or revise any forward-looking statements.
I would now like to turn the call over to your Mr. Louis Baldwin,Executive Vice President and CFO. Please proceed.
Louis G. Baldwin - Executive Vice President & Chief FinancialOfficer
Thank you very much for joining us today to discuss our secondquarter 2008 results and acquisitions that we have announced today,including exciting new acquisition to our Barnett Shale coreposition. Participating in Fort Worth today are Bob Simpson, XTO'sChairman and CEO; Keith Hutton, President; Vaughn Vennerberg,Senior Executive Vice President and Chief of Staff; and Tim Petrus,Executive Vice President of Acquisitions.
We'll start today's conference call with announced acquisitionswhich we are particularly proud of and then talk briefly aboutsecond quarter results. To recap acquisitions announced today, inaggregate we announced $2.1 billion in acquisition, $1 billion ofwhich closed during the second quarter and the balance would closeas we go through this year, including the aggregate total 485 Bcfof proved reserves represented by 55 million cubic feet a day ofproduction and 280,000 net undeveloped acreage in some of the bestbasins in the U.S., including the shale basins. That brings ouracquisitions for 2008 to a total of $10.6 billion, which we view asa handcrafted company unique compared with any other public companyavailable.
In aggregate, for the year, we've announced 2.3 Tcf of provedreserves acquired, 420 million cubic feet of daily production and1.4 million net undeveloped acreage, which have 6 Tcf to 8 Tcf ofupsides. We plan to fund these acquisitions that we have announcedtoday through a combination of long-term senior notes, equity andour commercial paper facilities. As always, we'll address ourcapital markets transactions when appropriate.
Looking to the second quarter, it was a strong quarter with XTObeating both First Call estimates for earnings and cash flow,production up 29% compared to the second quarter of '07 and up 4%sequentially compared to the first quarter. Adjusted earnings wereup 28% for the same period of last year and cash flow was up 41%.Results for the remainder for the year will benefit from additionaldevelopment growth, closing of acquisitions, including the alreadyannounced Headington and Hunt acquisitions and those announcedtoday along with higher commodity prices.
Comparing to First Call estimates, our earnings per share $1.09basic, a $1.07 diluted compared to First Call of a $1.05. It waslike... compared to GAAP earnings, we had $575 million and $1.11 indiluted earnings per share. The difference was a non-cash gain, aderivative fair value of $22 million, bringing our adjustedearnings to $553 million.
If we compare and look at our production for the quarter, gasproduction was 1.795 billion cubic feet a day, that is a 35%increase from the same quarter of last year. Oil production justover 51,000 barrels a day, that is 11% up from last year; NGLs15,574 barrels per day, up 3%. So as I previously mentioned Mcfeabout 2.2 Bs a day and that is up 29% for the year. If we look atbreaking out that 29%, 16% of that compared to last year comes fromacquisitions, 13% comes from development. I did mention there was a4% quarter over quarter growth. Of that 4%, 3%, the large majoritycomes from development growth and about 1% from acquisitions.
We didn't [ph] benefit from higher average prices as we wentthrough the quarter. Natural gas was $8.51 compared to 7.94 lastyear and 7.70 last quarter. Oil averaged $90.89 up from $80.74 lastquarter and NGLs $58.87 up from $52.98 last quarter.
Give you a brief hedging update, we have put some additional hedgesin place for 2008, '09 and '10. Looking at the balance of the year,we have 1.2 million cubic feet a day hedged at just over $8.30 thathas been put in place last year, and we've announced some newhedges, a 100 million a day at 12.64 for September throughDecember. Looking into 2009, we have about 300 million cubic feethedged at a price of $10.26 and 2010, a 100 million cubic feet at aprice of $10.27.
On the oil side, hedges put in place a couple of years ago, 30,000barrels a day at $74.20, and looking into the fourth quarter,13,000 barrels a day addition to that at $135.35. Looking into nextyear, we have 20,000 barrels a day hedged at a price of $126.20 andfor 2010, 15,000 barrels a day hedged at a price of $134.56. Astypical, all hedges are in the forms of swaps with most havingbasis hedges in place that are expected to be put in place.
Looking at revenues and cash flow of the quarter, revenues $1.936billion, up 46% from the second quarter of '07, operating cash flow$1.23 billion, up 41% from the same period of last year, and cashflow margin remains very constant at 64% compared to about 65% lastyear.
Looking at operating cash flow per share, we are at $2.38 on abasic... diluted basis, and that's up 29% from the same quarter oflast year. Gas gathering and processing margin, $16 million thisyear, that's up from $9 million in the second quarter of last year.
Turning to unit cost and guidance, if we look at productionexpense, it was $1.08 for the second quarter. That was aboveguidance of $1.00 to $1.05. However, we're keeping our guidanceconsistent in the $1.00 to $1.05. If we look into some detail ofproduction expense for the second quarter, we'll see that labor andoverhead was $0.25, which is flat with the first quarter of '08.Maintenance and workover increased to $0.60 per Mcfe, that's upfrom $0.55. So of the $0.08 increase, $0.05 came from maintenanceand workover and that really came as a result of increased work inSan Juan Rockies and Permian division, primarily on the Dominionproperties. As we bring those up to our standards, we expect thosenumbers to come down.
The second-largest component of increase was power, fuel and CO2,that's up $0.03 to $0.21 per Mcfe. And if you look at the averageprices for the quarter, natural gas increased on average basisNYMEX, $2.90 from $8.03 to $10.93. Oil prices were also up, so agood portion of this increase comes just from the higher thanprojected commodity prices. Compression and other expenses were$0.02, so they were flat. So the majority of the increase camesolely from maintenance and from power and fuel. Therefore, we arelooking at our pricing case for the remainder of the year and weexpect, given the benefit of additional acquisitions coming on,particularly Headington and Hunt that have a lower per Mcfe cost,that cost to come back within guidance of a $1 to $1.5.
Looking at taxes, transportation and other, again higher thanexpected due to the increased commodity prices and that was thesole reason for that. Again, we averaged about $3 higher on gas andwere about $26 higher on oil compared to the first quarter.Exploration expense $0.07, within guidance, DD&A $0.07 withinguidance. We are increasing our guidance range for the remainder ofthe year due to the acquisitions at a higher per Mcfe cost inparticular the Headington and Hunt acquisitions.
As a retirement obligation, a $0.03 in guidance, cash G&A $0.29within guidance, stock-based non-cash G&A $0.16 as expected andinterest expense of $0.51 within guidance. If you look at thecapitalized interest, that was $8 million for the quarter and weare increasing our guidance moving forward due to increasedborrowings for the acquisitions that have been announced. Incometaxes 36.4% effective rate with a current portion of 32% paid incash for current.
Looking at our capital expenditures, development costs of thequarter were $767 million which are equal to the development costof the first quarter, also $767 million, so 5.35... excuse, $1.534billion for the first half. Unproved property acquisitions, $910million, that is an increase from $739 million for the firstquarter bringing us to $1.649 billion for the first half of theyear. Proved property acquisitions, $850 million. When added to$521 million for the first quarter, it brings us to $1.371 billionfor the year. Gas gathering and processing and other assetacquisitions, $200 million, when added to a $150 million for thefirst quarter gives us $350 million for the first half. If you lookat our total capital expenditures for investing activities, $2.727billion for the second quarter, when added to 2.177 billion for thefirst quarter comes up to $4.904 billion for the year.
If we look at the balance sheet, total assets at 6/30 $630 up to$24.3 billion, long-term debt, 6... $7.9 billion which does includethe effect of $1 billion in acquisitions closed during the quarterthat were announced today; shareholders equity, $8.9 billion, whichdoes include other comprehensive income of $1.2 billion. Thatnumber did spike up from 500 million due to the increased commodityprices. So, if we look at debt-to-cap net of other comprehensiveincome, 43.7%, so the balance sheet is in good shape at the end ofthe quarter.
With that, I will turn it over to Keith Hutton to talk about ouracquisitions and the quarterly results.